Tax-free Bonds are good before interest Rate Falls

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With more cuts in policy rates this year, future bonds will offer lower returns. Lock your money now, says

 

 

HUDCO and IRFC have extended their ongoing public issues of tax free bonds, even as RBI slashed key policy rates last week.

Clearly, the institutions are trying to cash in on the consensus that interest rates are likely to fall soon and investors better lock in investments at the rates available in the market.

Some banks have already reduced their lending rates, underscoring the possibility of a lower interest rate regime in the coming months.

Interest rates are expected to move down from here. Current yields offered by the ongoing tax free bonds are attractive and it makes sense to invest now. Many experts believe it is not wise to wait for better rates.

RBI is likely to reduce the benchmark interest rates by 50 to 75 basis points in the current calendar year. That means the forthcoming tax free bonds are likely to offer lower rates. In fact, the interest rates payable on the 10- and 15-year "AAA" rated tax-free bonds have come down from 7.72% and 7.88% (REC Tax-Free Bonds) to 7.68% and 7.84%(ongoing IRFC Tax Free Bonds) in the last two months. If the borrowing numbers mentioned in the budget remain in line with market expectations and inflation remains within the comfort zone of RBI, we may see further rate cuts.

Tax-Free Bonds

Before putting in money in the current crop of tax-free bonds, it pays to know the investment options in this space.

HUDCO has a credit rating of "AA+" and offers tax-free interest of 7.84% and 8.01% for 10 and 15 years, respectively, to retail individual investors.

IRFC has a credit rating of "AAA" and offers tax-free interest of 7.68% and 7.84% for 10 and 15 years, respectively, for retail individual investors, who can invest up to . 10 lakh in these bonds. If you want to invest more than . 10 lakh in one name, you get 50 bps lower interest rates.

HUDCO and IRFC bonds are closing on February 7 and February 8, respectively. If you compare these two options with the recent private placement of "AAA" rated 10-year NHB bonds, which offered 6.85% tax free, they appear to be far more attractive.

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